What should I do with my house?
Okay, I am going to lay it all out and see what you think.
We own a home in another state. I am gainfully employed and making a decent wage – at least for us – in our new location. We are coming up on fourteen months since our move and we have had little or no interest in our home. When we last refinanced, our home was 90% mortgaged. We used most of the money from our second mortgage to improve the home just before the subprime mortgage crisis hit.
Our house has plummeted in value over the last year and a half. The mortgage is now worth 120% of the value of the home. A drop in value would not be so bad if we were living in the house, but the problem is that we now live in a different state.
We have stayed current on our mortgage, home equity loan, insurance, utilities and property taxes by rustling up extra income as best we could. We had a renter in the house for a short time, but the rent did not cover our expenses. Our monthly obligations for this house are between $1,000 and $1,200 per month, depending on utilities.
Our credit score is currently very good – in the top 10% of all credit scores, but this month we officially go into the red. We have a little bit of wiggle room since I recently took out $14,000 by virtue of a 0% APR balance transfer through March of 2010. We have exhausted our savings (other than the balance transfer money) and have cashed out most of our retirement savings.
Here are my options as I see them:
This means we lower the price as far as possible to get it to sell. I think this means that our second mortgage probably does not get paid and our first mortgage holder gets what they gets. In a short sale, the balance of the loan counts as household income on my tax return next year. So if my loan amount is $150,000 and I sell it for $90,000, I have to report the difference of $60,000 as income to the IRS next year. Lovely.
It is unclear to me how this strategy affects my credit.
Just quit making payments. I have seen some calculators where a foreclosure only dings my credit score by 100 points – which is not too bad since my rating is very high. It seems to me that there must be more to this penalty.
Thankfully, this is not strong a possibility at the moment, unless I lose my job. We could be living relatively comfortably on my income if we did not have this house. In fact, we probably could have put $8,000 to $10,000 in the bank this last year . . . instead we have stayed current on our payments and have nothing to show for it.
Deed in lieu
With this strategy, I strike a deal with the second mortgage company where I agree to pay them or they forgive the loan or let me pay it off at a reduced rate. As a result of our agreement, they release their lien on the home. I then simply give the house to the first mortgage holder and beg them not to foreclose. I have friends who made this work and it did not affect their credit, however,for most of them, they executed this strategy before this current crisis.
Stick it out, keep making payments and hope it sells sometime in the next year. The problem is that I would be very unlikely to recoup my investment, unless home values shot up 30% in the next year. The payments I am making are not going into equity and in the meantime I am making no retirement contributions and we have no savings or emergency fund.
So you can see, we are in a pickle.
I am not desperate or worried – I am confident that God has a plan. Even in bankruptcy, He will meet our needs. However, that fact does not excuse ignorance or laziness on my behalf. I am researching every possible option in order to make the best decision for my family and our future.
Most GLBL readers are smart people – any thoughts or suggestions?
Photo by dingbat2005